Since the ascent of Tony Abbott to the leadership of the Coalition, the renewable energy markets have had many a forehead slapping moment. In September, the list grew with the Turnbull government’s divisions on energy and climate policy in the limelight, with scapegoating and distractions continuing to supplant policy progress. Once upon a time such a situation would have had a significant impact on the market, this time around it has been largely ignored.

The divisions in the Turnbull government on climate and energy policy have long been known. Leaderships have been won and lost on the back of it, and may yet be again.

In September, with the Prime Minister and Energy Minister attempting to woo conservatives within the government, just how bogged down the government is on the matter was laid bare.

Instead of reaching agreement on the missing piece of the puzzle; a long term policy mechanism which would underpin the transition towards a decarbonised energy sector, the Turnbull government instead produced one of the more bizarre events in recent times in which it attempted to coerce, and then ultimately beg, the head of a major energy retailer to keep an ancient coal fired power plant open beyond 2022, against all financial and environmental reason.

And when that failed senior members of the government including the head of the environment and energy committee Craig Kelly then sought to attack that company for not going along with the farce.

Shortly afterwards and as a surprise to no one, Tony Abbott chipped in with his two bob’s worth, repeating calls for the repeal of the renewable energy target and threatening to cross the floor against the introduction of the Clean Energy Target.

It appears Abbott sees energy and climate policy not for the vital environmental and economic outcomes that it governs, but instead as an opportunity for wedge politics and a way to wound his political opponents.

Once upon a time this type of political calamity might have weighed heavily on the market. Yet Abbott and his acolytes’ opinions are now so obviously out of touch with scientific, community and business views on the matter that he and the grim theatrics he brings have become an irrelevance to the market.

Sure enough during September the sideshow had little impact.

Having began the month in the low $85s, the spot LGC market was largely stable across the first half of September with trade in the forward market overshadowing the spot. The big mover during this time was the Cal 19s which rallied from the mid $79s to reach a high of $83.50, before the momentum switched and saw the contract soften back below $80.00 by late in the month.

The Cal 18 contract was largely stable across the first half of the month but it too ultimately lost ground, reaching a low of $84.90 late in the month before a recovery of sorts saw it back up to $86.00.

Following a similar trajectory the spot market softened to a low of $81.90 in the second half of the month, only to recover to $83.00 by months’ end as buyers re-engaged.

Spot trade volumes during the month were back up, falling just shy of the 400k mark, with fewer smaller volume transactions and more trades in the 10-25k range taking place.

The market for Cal 20 – which remains illiquid – presents an interesting litmus test for the future of the scheme. There are few now who do not think that a shortfall in the Cal 19 compliance year is the most likely outcome. Yet Cal 20 is a very different situation.

The extra year allows enough time for as yet uncommitted (and often larger capacity) wind projects to make a major contribution, while obviously providing plenty of time to the countless solar projects vying to become a reality.

For what patchy trade has taken place in the over-the-counter market to date, the Cal 20 contract has been valued in the mid to high $40s; a level somewhere in between the marginal cost required to get projects off the ground and the scheme’s penalty price. To date, the market has erred on the side of the target being met by 2020, with buyers exercising caution and willing to take their time given how large the potential project pool remains.

Yet it is possible that this could change over the coming months. What happens to the Cal 20 price from here will be a proxy for expectations of whether the 2020 target will in fact be met, or instead if the shortfall will spill over into another year.

Small-scale Technology Certificates (STCs)

Prices as at 29th September 2017

2017 has been a year of twists in the STC market and September stayed true to form, for despite the ongoing growth in installations and STC supply, the STC market enjoyed a resounding recovery across the month.

The spot STC market began the month at $30.50 and following a stable start, eventually strengthened to the $32 mark on the back of (at times) patchy and volatile activity. Still very much within the recent range, the market would convincingly break through that range on its way to a surprise high of $36.25, on the back of a seemingly innocuous Clean Energy Regulator email.

The email seemed to outline what an objective observer might call the bleeding obvious: that system installations in the first half of 2017 were way up (23%), that owing to the oversupply the Clearing House was unlikely to be used before mid 2018 and that the 2018 target was going to have to be increased. Each of these statements appears fairly self evident.

Yet it appears that the final statement regarding the 2018 target is what got the market excited, with many interpreting it to mean that the 2018 target will be set at such a level as to restore the market to balance in 2018.

That the 2018 target was going to have to be increased is undisputed. Conservative estimates of the 2017 surplus of STCs now expect 7m+ by year’s end. For the 2018 target not to be increased, it would mean the calculation for the number of STCs to be created in 2018 to be set at circa 7m, while we appear set to create more than 20m this year.

Therein lies the crux of the issue. The 2018 target has to be increased, of that there is no doubt. But the question remains whether the drastic step will be taken to more than double the 2017 target of 12.45m STCs to something in the 25-27m range for 2018, which currently appears the necessary increase required to see the Clearing House (CH) returned to activity in 2018.

If instead, for example, a significantly increased target of say 20m was adopted for 2018, it would likely leave a surplus of 5m+ STCs un-surrendered at the end of 2018, thus ensuring that the CH was not used until perhaps mid to late 2019.

In September, it appeared that the first of these two scenarios was being anticipated with the market returning to a level not seen since July when the market was in freefall; a level which most believed would not be seen until well into 2018. In the coming months it will be interesting to see whether the market maintains such an optimistic view or if instead the mounting surplus and uncertainty of next year’s target once again take their toll.